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MENA bond markets require essential allocation in regional portfolios says industry expert

Strong structural drivers and a huge sukuk pipeline to support growth
Al Masah Capital Limited unearths the great debt market opportunity and the return of investor optimism

Dubai, United Arab Emirates: Sukuk and bond issuances in the Middle East and North Africa (MENA) region totaled $24.2 billion in the first half of 2010, staging a broad-based recovery and ushering in much needed stability to regional capital markets.

Planned capital expenditure and infrastructure investments are likely to drive the Middle East and North Africa debt markets in the coming quarters, staving off the period of uncertainty currently prevalent due to the European sovereign debt crisis and the Dubai World restructuring.

The Mena bond market with its huge untapped potential is a fertile ground for investors, particularly retail investors, according to a latest report 'MENA Bond Market: Untapped Potential and its Impact on Your Portfolio' by alternate asset management firm, Al Masah Capital.

"The sizable sukuk pipeline for 2010 and 2011 indicates significant expansion of debt financing in the region. The situation has improved markedly as there have been key, successful issuances in the MENA bond markets in the first half of this year," says Shailesh Dash, Founder and Chief Executive Officer of Al Masah Capital.

"The recent issuances have provided stability to bond markets, raising optimism over its future performance and lifting overall investor sentiment. We believe that the recovery in oil prices and high amount of economic activity in the form of massive investments in non-oil sectors will aid the future growth of debt markets in the region."

During the first half of 2010, several bonds were issued from Bahrain, Abu Dhabi, Saudi Arabia, Egypt and Dubai in the MENA region, the most prominent being the Saudi Electricity Company's (Saudi Arabia) SAR7 billion issue, DEWA's (Dubai) $1 billion issue and the Egypt government's EGP10 billion bond issue.

"When properly developed, the Middle East and North Africa's (Mena) debt market holds huge potential to support fiscal growth and prepare the region for the next wave of development as well as provide diversification of risk against any impending economic crisis," added Dash.

Bond issuers raised $61.5 billion in 2009 (representing 84.5 per cent of total bonds issued) while 33 sukuks worth $11.3 billion were also issued in the same year. The value of global sukuks issued increased to $19.15 billion in 2009 with the MENA region accounting for 40 per cent of this value.

Dash said the MENA sukuk market was expected to register robust growth in the near-term and this reflected in the strong pipeline - as many as 52 sukuks worth $14.83 billion are planned for 2010 and 2011.

The region is now witnessing the return of targeted investor interest in the debt markets. "In the past five years, the share of bonds in the investor portfolio, be it bonds, bank deposits or market capitalisation of listed stocks, increased from 1.7 per cent in 2005 to 5.1 per cent in 2009 in the GCC region," he said.

This reflects increasing investor optimism towards bond markets compared to other capital market components. "In fact, bond markets performed better compared to equity markets in the region during the crisis period and this is evident from the returns offered by regional bond indices compared to equity market indices."

While the Middle East Conventional Bond Total Return Index (MEBI) declined just two per cent during the tumultuous July 2008-July 2009 period, regional indices such as Dubai Financial Market, Kuwait Stock Exchange and Tadawul plummeted 67.2 per cent, 47.7 per cent and 40.2 per cent respectively.

Inspite of obvious advantages, most of the investments in the region's bond market are concentrated in the hands of institutional investors and the absence of secondary trading platforms makes the bond market highly inaccessible to regional retail investors.

"There is a significant need to develop the secondary bond market in the MENA region, which is characterized by low trading activity on regional exchanges such as Tadawul. In addition, an improved regulatory structure in the form of a developed of secondary bond market would lead to greater transparency."

Dash said the global economic uncertainty and the fragile recovery in European debt markets are the near term risk factors for the regional debt markets. "However, we expect the MENA's strong structural drivers to support the growth of the region's bond market in the long term."

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© Press Release 2010

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